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3 Dividend Stocks On My Buy List

Let's look at three companies on our DSR buy list that could be a good opportunity.

While the market is trading at very high levels for a while, investors have difficulty finding value. I bet you think you are better off waiting on the sideline for the next market crash, right? But what if it happens in 3 years? Did you think of your opportunity cost?

It doesn't mean you must jump in the market blind and buy anything you see. Some stocks have been going sideways recently. They are missing the latest bull trend, which could be a good opportunity for you to grab those shares. Let's look at three companies on our DSR buy list.

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Xcel Energy (XEL)

Xcel Energy Inc. is a public utility holding company. The Company's operations include the activity of four utility subsidiaries that serve electric and natural gas customers in eight states. The Company's segments include Regulated Electric and Regulated Natural Gas. The Company's utility subsidiaries include NSP-Minnesota, NSP-Wisconsin, Public Service Company of Colorado (PSCo) and Southwestern Public Service Co. (SPS), which serve customers in portions of Colorado, Michigan, Minnesota, New Mexico, North Dakota, South Dakota, Texas and Wisconsin. Along with WYCO Development LLC (WYCO), a joint venture formed with Colorado Interstate Gas Company, LLC (CIG) to develop and lease natural gas pipelines, storage and compression facilities, and WestGas InterState, Inc. (WGI), an interstate natural gas pipeline company, these companies comprise the regulated utility operations.

Investment Thesis

Utilities and stability could be used as synonyms. Xcel expects to invest $24B in new infrastructure between 2021 and 2025. This falls within its plan to become 100% carbon-free by 2050. This massive investment plan should generate earnings growth of 6% per year which will also allow the dividend to grow as well. Xcel has taken an early lead in renewable energy, and it should pay off going forward. The utility enjoys a favorable geographic position as Minnesota and Colorado are among the best wind resources in the U.S. There is $18B of the $24B CAPEX that will be dedicated to these states. Xcel should also benefit from strong political and regulatory support for gas distribution system hardening projects. The chances of getting rate increase approvals for such.

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Potential Risks

XEL is moving forward with a massive investment plan of $24B. Utilities usually expect regulators to approve rate increases commensurate with the money they invest. In a low-interest rate environment, debt is cheap, and regulators consider the lower cost of capital in their rate increase assessments. Regulators also exist to protect consumers. This could lead to less profitable projects going forward. Regulators may also consider the current recession before increasing rates to customers that already are hard pressed to meet their bills. We had a good example of recent decisions from Colorado’s regulators to cut XEL’s returns on their latest projects.

Dividend Growth Perspective

Xcel raised its dividend by 6.58% in 2019 and kept the same trend in 2020 (+6.17%) and 2021 (+6.5%). This is what we call stable dividend growth. In a recent presentation (Jan 2021), management plans to keep its 5-7% dividend growth target going forward with a 60-70% payout ratio. The dividend growth policy is fueled by an impressive investment plan of $24B over the coming years. Renewable energy is expected to contribute the highest growth for Xcel moving forward, but there are still many sources of stable income coming from their existing customers. Xcel should continue its streak of dividend increases for many years to come.

ViacomCBS (VIAC)

ViacomCBS Inc. is a global media and entertainment company that creates content for audiences worldwide. The Company's business segments include TV Entertainment, Cable Networks, and Filmed Entertainment. The TV Entertainment segment operates the CBS Television Network, its domestic broadcast network; CBS Studios and CBS Media Ventures, its television production and syndication operations; its CBS branded streaming services, including CBS All Access/Paramount+; CBS Sports Network, and its cable network focused on college athletics and other sports. The Cable Networks segment operates a portfolio of streaming services, including Pluto TV, a free advertising-supported streaming television (FAST) service and Showtime Networks’ subscription streaming service (SHOWTIME OTT). The Filmed Entertainment segment operates Paramount Pictures, Paramount Players, Paramount Animation and Paramount Television Studios, and also includes Miramax, a consolidated joint venture.

Investment Thesis

The merger between both companies was a good idea. Content creation limits new players’ ability to enter this arena. VIAC now enjoys a strong broadcast network reaching over 100M American households. The company offers popular and unique channels and sports broadcasting rights to advertisers. They have licensed their content to other streamers like Netflix in the past, but this may change in the future as VIAC is working on its own streaming service. The recent raise of capital sparked the sell-off, but we think it was a smart way to cash in on a high valuation to support spending on its new streaming business. The media company is known to create blockbuster TV series, so let’s hope that continues going forward. VIAC remains a speculative play.

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Potential Risks

Part of ViacomCBS’s business is linked to the “old” cable industry. As many customers cut the cord, VIAC must deal with a slowly dying cash flow. The company may be entering the streaming service party a little late. It was licensing its content before, but now it seems like they want to become another player in this growing industry. VIAC’s success will revolve around its ability to create high-quality programs. Most recently, the company has been on the news (end of March 2021). The stock price started to decline after the announcement of an equity raise in Class B common shares and mandatory convertible preferred shares. The arrival of 20 million new shares was the first spark to a significant sell-off. Then, the stock continued to drop as Archegos Capital (a hedge fund) was forced to sell more than $20B in stocks on Friday due to a margin call. VIAC lost 50% of its value in a single week. It’s an interesting speculative play but proceed with caution.

Dividend Growth Perspective

VIAC had to wait more than a year to increase its dividend as it was working on the merger. The company rewarded shareholders with a massive increase (from $0.18 to $0.24) to compensate for that delay. As the company continues to integrate both companies together, we doubt there will be another dividend increase in 2021.

Gentex (GNTX)

Gentex Corporation designs and manufactures automatic-dimming rearview mirrors and electronics for the automotive industry, dimmable aircraft windows for the aviation industry, and commercial smoke alarms and signaling devices for the fire protection industry. The Company's business segment involves designing, developing, manufacturing and marketing interior and exterior automatic-dimming automotive rearview mirrors that utilize electrochromic technology to dim in proportion to the amount of headlight glare from trailing vehicle headlamps. Within this business segment, the Company also designs, develops and manufactures various electronics that are features to the interior and exterior automotive rearview mirrors, as well as interior visors, overhead consoles, and other locations in the vehicle. The Company ships its products to all of the automotive producing regions across the world, which it supports with various sales, engineering and distribution locations across the world.

Investment Thesis

Gentex is the industry leader and its products are on the way to becoming industry standards. GNTX also shows a stellar balance sheet with virtually no debt and tons of patents. It can weather any economic storm and could become an interesting candidate for a merger. GNTX also benefits from being the first to offer this high-quality product. This leads to higher margins for early adoption and puts Gentex #1 in automakers’ mind for future orders. We appreciate the company’s effort to diversify its business model and not remain a “one-trick-pony”. The company is expanding its product offerings to toll modules, airplane windows, and in the long-term healthcare applications such as lighting for operating rooms and iris identification and smoking detection for the interior of autonomous vehicle fleets. Gentex is set to continue its growth for at least a decade. Finally, Gentex will benefit from the “EV wave” as those vehicles includes lots of new technologies (such as auto-diming mirrors!). You can learn more about how to get exposure to the Electric Vehicle trend in this podcast.

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Potential Risks

Magna Mirrors is GNTX’s largest competitor and has more resources. If Magna decides to compete with a similar technology, it could win. Also, GNTX doesn’t operate in a vast economic moat and has limited pricing negotiation power with automakers. The automotive parts industry is very cyclical and new technology could hurt (cameras could replace mirrors). Sales could get hurt during a recession as its products are still considered a luxury. However, its strong R&D budget enables it to develop new technologies. Gentex must deal with the semiconductors shortage which will affect its revenue in 2021. We expect the situation to improve in 2022.

Dividend Growth Perspective

GNTX has increased its payouts each year since 2011 but has not increased it in 2021 yet (July 2021). We were disappointed by the 2019 increase (+5%) and 2020 (+4.5%), but we can expect steady growth in the next few years. Current payout and cash payout ratios allow room for future increases. Gentex is sitting on a pile of cash (over $456M as of March 31st, 2021) and has virtually no debt. Expect mid-single-digit dividend growth numbers for the next decade. Management will also continue its share buyback program. Don’t mind the company’s DDM valuation; low yielding stocks must show double-digit growth to show any value using this model.

Final Thoughts

As you can see, if you dig a little deeper, you can find companies hitting bump roads. While those companies should do well over the long run, they are being penalized for short-term events. This is how the market reacts to bad news. Now it's up to you to analyze and seize those opportunities!

Cheers,

Mike Heroux, Passionate Investor & founder of Dividend Stocks Rock

P.S. Are you concerned by the current state of the market? I recently hosted a free webinar on What To Buy In This Overvalued Market? Know What to Buy, Know When to Sell. Watch the replay here!

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**Please do your own due-diligence before investing in any stocks we discuss in this article**

I may hold shares of companies discussed in this article.

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